Frazier Baker & Will Barden
If you have an office lease and you’ve ever received an invoice for a property tax and operating expense pass-through, you’ll want to read this article to make sure you understand the process. You may be paying more than you should.
Your first question may be: what is a property tax and operating expense pass-through?
In many office leases, the tenant is responsible for his or her share of increases in property taxes and building operating expenses. The landlord usually closes the books on a building at the end of each calendar year and prepares a summary of building operating expenses and property taxes. Once the total expenses are calculated, they are compared to a “base year” or fixed amount set forth in the tenant’s lease. If an increase has occurred, the landlord will calculate the tenant’s pro-rata share of the increase and send an invoice for this additional amount.
As office brokers, we’re often called on by clients to review these summary statements, particularly when a relatively large sum is due. In reviewing these annual summaries, we’ve come across many instances where mistakes have been made, sometimes resulting in an overcharge to tenants. While not frequent, we’ve seen cases where a client has been overcharged by thousands of dollars. The problem stems from the complexity of the calculation and/or a lack of experience of the preparer.
Your next question should be: what should I do to ensure I don’t overpay?
First: Be on the lookout for this annual accounting from your landlord or property management company and examine it closely before approving for payment. The accounting should contain two sections. The first is a summary of taxes and operating expenses by category. The second is a calculation comparing the most recent year with the appropriate prior year. If an increase has occurred, your pro-rata amount of the increase will be determined.
Next: Compare, compare, compare. Pull out prior years accountings and compare them to the expenses claimed in the year in question. Identify significant increases in each category and ask questions. For instance, why did building maintenance increase so much? Why are management fees up?
Make sure the base year used for comparison is correct. If the base year amount shown is lower than it should be, this will trigger a higher pass-through, resulting in an overcharge to the tenant. If you have been paying estimated increases monthly based on a budgeted increase, make sure you are credited for all payments made. An understatement of your estimated payments would also lead to an erroneous request for additional payment. If you lease multiple suites with different base years, you can see how complicated this can become and how easily the pass-through charges can be miscalculated.
Interested in learning more? In a follow-up article, we’ll share some specific errors we’ve seen in the past, along with some best-practices reports.
Frazier Baker, vice president of Office Services, and Will Barden, vice president of Office Services, provide office tenant representation services for Colliers International | Memphis.